The big fat tax debate

There are two strands to the big fat tax debate. First, there is the little amount of tax wealthy firms and individuals pay; and second, where they pay their tax. It is perfectly understandable at a time of squeezes on living standards that people are outraged about the ‘fairness’ of the tax system, as far wealthier people pay less in proportion of their income or earnings in tax, compared to them.

But firms and some individuals can legally avoid tax by using the tax code to their’ advantage through a tax scheme or some other loophole allowed by the tax code. By employing a ‘good’ accountant, they can minimise their tax liability to much lower levels in proportion to those on the Pay As You Earn (PAYE) system that most people are enrolled onto. So funnily enough, tax avoiders are actually complying with government legislation and have the absolute right to do so.

The inequity of the system is because we have a bloated, bureaucratic, and complicated tax system. The tax code is 11,000 pages long and with all that space for individuals to move in, those not on PAYE can take the system for a ride. When Jimmy Carr avoided so much in tax, it was because there was a scheme there allowing him to avoid paying a lot more in tax. This applies to many more people, and even those who run small companies, as they are on a different tax system to most people.

The second point relates more to firms and how much they pay. They can use the complicated tax code to reduce their tax burden domestically, but also can use other simple ways to pay less tax because of EU law.

There have been a number of stories recently about tax avoiding technology companies. eBay for example earned £181 million in 2010 in the UK, but only paid £1.2 million in UK corporation tax. If they were fully based in the UK, they would have paid £51 million in tax. eBay however is based in low tax Luxembourg and therefore pays far less. As the EU/EEA (European Economic Area) is a free-trade zone, a firm can set itself up in the lowest tax environment member state, but trade and sell its services anywhere in the EU, therefore complying with EU law and pay less tax.

I have mentioned tax havens within the EU/EEA, but why do firms base themselves in the Cayman Islands and Bermuda? Because corporation tax is too high in the UK and Europe, and it is one of the worst forms of taxation. If we tax the means of production, and capital is mobile, then it can move offshore pretty easily even if they operate on our shores. By taxing capital that is essential to productivity, it lowers output and wages.

It is not the government applying the tax code incorrectly that the misinformed accountant Richard Murphy and UK Uncut seem to believe, but the system is terrible and open to manipulation. In addition, high taxes on capital push firms away from our shores to somewhere else, leading to productivity losses. So what are the solutions to these problems?

First of all we should pursue a radical slimming down of the tax system, through simplification and lower taxes so that the principle of Equality Before the Law is better enforced. This will make the tax system fairer domestically, and will attract some offshore individuals back to the UK.

Second, we should abolish corporation tax; we need to remember corporations don’t pay tax. The burden of the taxation falls on the profits of shareholders and with less profit is less reinvestment to grow. Employees are effectively taxed as well, because less capital is employed, leading to lower output, corresponding to lower wages. We should raise either land value or consumption taxes to offset corporation tax abolition.

Wealthy individuals and big firms would rather be based where they produce their wealth as it costs them money to relocate. If we had simpler, transparent, lower and less distortive taxes, we will welcome them back from exile.

3 comments

I admire the idealism you propose. Abolishing corporation tax and lowering taxes generally would attract big businesses and their owners to Britain’s investment-hungry shores.

However, Corporation tax has on average made up 10% of UK tax receipts over the past 10 years and raised over £40,000 million last year. http://www.hmrc.gov.uk/stats/tax_receipts/tax-nic-receipts-info-analysis.pdf
Government debt and deficit reduction is the biggest issue in the European economy presently, and how it is handled may determine whether the Euro-zone endures or is shattered by peripheral economies, like Greece, crashing into deeper recessions. At such a time as this, with the UK Government struggling to keep to its deficit reduction plan as it is, you want to radically reduce it’s tax sources?

Devoting one sentence to explaining how this shortfall will be redeemed is naive and inadequate.

It is difficult to outline plans in detail when I have 700 words to play with, but I can understand if it can come across quite sweepingly.

If you switched from CT to a Land Value Tax, you will the effects immediately. Capital will come back (plus even more) as capital is not taxed, and firms cannot escape LVT, and therefore would pay it.

The combined effect of an influx in capital increasing productivity, wages and output, whilst raising through a LVT would be greater than the current receipts on CT (that’s the theory; short term shock to tax revenues, long term gain is the argument). What I don’t understand however, is why tax the most mobile resource? It doesn’t make sense. The Nordics know this, that is why they tax CT less than us and consumption more.

At times as we are in now, it would take a government much courage to make such a decision, and so it would be pretty idealistic. If I point you to read Tim Worstall on the matter, and his policy recommendations, this is the logic I am following.

On the Greece matter; Greece faces two huge problems. First, they are seeing debt-deflation as asset prices are much higher than they should be, whilst debt is remaining fixed; and second they have a massive problem with tax collections and spending. They are going through a necessary process of correction that is ultimately painful. For them, there is no alternative.

I’ll point you to an article by the IEA Education Director that is on the European Issue as it is worth reading:

The dynamics in each country is slightly different, as Spain for example isn’t facing fiscal problems because of excess government spending, but asset prices are hugely over-inflated, leading to an insolvent banking system. The fiscal crisis stems from the bailout of the banking system.